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| TREE > SEC Filings for TREE > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
Management Overview
On August 20, 2008, Tree.com, Inc. ("Tree.com") was spun off from its parent company, IAC/InterActiveCorp ("IAC") into a separate publicly traded company. We refer to the separation transaction as the "spin-off." In connection with the spin-off, Tree.com was incorporated as a Delaware corporation in April 2008. Tree.com consists of the brands and businesses that formerly comprised IAC's Lending and Real Estate segments. These brands and businesses include LendingTree.com, RealEstate.com, GetSmart.com and Home Loan Center, Inc. (d/b/a LendingTree Loans).
Following the spin-off from IAC, the new chief operating decision maker began to realign the Tree.com businesses into new operating segments. For the first quarter of 2009, management completed its realignment of staffing and direct revenue and costs for each new segment and created reporting structures to enable the chief operating decision maker and management to evaluate the results of operations for each of these new segments on a comparative basis with prior periods. In prior periods, the segments "Lending" and "Real Estate" were presented, which have been changed to "LendingTree Loans", "Exchanges" and "Real Estate" segments. Additionally, certain shared indirect costs that are described below are reported as "Unallocated-Corporate." All items of segment information for prior periods have been restated to conform to the new reportable segment presentation.
The expenses presented below for each of the business segments include an allocation of certain corporate expenses that are identifiable and directly benefit those segments. The unallocated expenses are those corporate overhead expenses that are not directly attributable to a segment and include: corporate expenses such as finance, legal, executive, technology support, and human resources, as well as elimination of inter-segment revenue and costs.
The LendingTree Loans segment originates, processes, approves and funds various residential real estate loans through Home Loan Center, Inc. ("HLC"), (d/b/a LendingTree Loans). The HLC and LendingTree Loans brand names are collectively referred to in these consolidated financial statements as "LendingTree Loans."
The Exchanges segment consists of online lead generation networks and call centers (principally LendingTree.com and GetSmart.com) that connect consumers and service providers principally in the lending and higher education marketplaces.The Real Estate segment consists of a proprietary full-service real estate brokerage (RealEstate.com, REALTORS®) that operates in 20 U.S. markets, as well as an online lead generation network accessed at www.RealEstate.com, that connects consumers with real estate brokerages around the country.
Results of operations for the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008:
Revenue
For the three months ended September 30, 2009 compared to the three months
ended September 30, 2008
Three Months Ended
September 30,
2009 % Change 2008
(Dollars in thousands)
LendingTree Loans:
Origination and sale of loans $ 22,495 26 % $ 17,911
Other 1,614 (23 )% 2,082
Total LendingTree Loans 24,109 21 % 19,993
Exchanges:
Match fees 12,438 3 % 12,114
Closed loan fees 5,318 (35 )% 8,196
Other 854 54 % 554
Inter-segment revenue 5,244 10 % 4,761
Total Exchanges 23,854 (7 )% 25,625
Real Estate 7,997 (18 )% 9,781
Inter-segment revenue (5,244 ) 2 % (5,141 )
Total revenue $ 50,716 1 % $ 50,258
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LendingTree Loans revenue in 2009 increased $4.1 million, or 21%, from the same period in 2008. Revenue generated from the origination and sale of loans in the secondary market increased $4.6 million, or 26%, primarily due to a dramatically declining mortgage interest rate environment that began late in the fourth quarter of 2008, improvement in revenue per closed loan and higher loan closing rates. Offsetting this increase in revenue was a higher charge to the provision for previously sold loans, which is recorded as a reduction of revenue. The provision increased from $0.8 million in 2008 to $4.2 million in 2009, reflecting an increase in the trend of loan repurchase requests received in the third quarter that related primarily to loans sold in 2006 and 2007.
The dollar value of loans closed directly by LendingTree Loans is as follows:
Three Months Ended
September 30,
2009 % Change 2008
(Dollars in millions)
Refinance mortgages $ 538 48 % $ 363
Purchase mortgages 82 (31 )% 120
Total $ 620 29 % $ 483
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LendingTree Loans originates mortgage loans on property located throughout the United States. Revenue from loans originated for property in California totaled approximately 8% and 4% of Tree.com's consolidated revenue for the three months ended September 30, 2009 and 2008, respectively.
Revenue from the Exchanges decreased $1.8 million, or 7%, due primarily to fewer loans closed through network lenders, reflecting the impact on consumers of continued tight credit standards at
most lenders. Match fees did increase slightly during the period, which reflects an increase in matched requests for our education leads as a result of an acquisition in the third quarter of 2009, offset by fewer matched requests with network lenders. Matched requests with network lenders in the third quarter of 2009 were down 29% from the same period in 2008. Following the first five months of 2009 when consumer mortgage rates were at or near historical lows, rates increased significantly (50 to 60 basis points) over a short span late in the second quarter and early in the third quarter of 2009. This rapid increase in rates from historical low levels contributed to fewer consumers making a loan request in the third quarter. The decline in loan requests coupled with fewer consumers who could qualify for a loan in this tight credit market caused the decline in matched loan requests.
The dollar value of loans closed by Exchange network lenders is as follows:
Three Months Ended
September 30,
2009 % Change 2008
(Dollars in millions)
Refinance mortgages $ 991 (24 )% $ 1,310
Purchase mortgages 705 (43 )% 1,231
Other 155 (66 )% 429
Total $ 1,851 (38 )% $ 2,970
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No single Exchange network lender accounts for revenue representing more than 10% of Tree.com's consolidated revenue for any periods presented.
Real Estate revenue decreased $1.8 million, or 18%, principally due to a decrease in closings year-over-year due to the persistent negative real estate market conditions contributing to lower home sales prices and fewer real estate transactions overall. The dollar value of the Company's real estate closings decreased $186 million, or 36%, from $516 million in 2008 to $330 million in 2009. However, Real Estate experienced positive growth in the number of agents working for our company-owned brokerage, which increased from 1,100 at the end of the third quarter 2008 to over 1,300 at the end of the third quarter 2009.
For the nine months ended September 30, 2009 compared to the nine months
ended September 30, 2008
Nine Months Ended September 30,
2009 % Change 2008
(Dollars in thousands)
LendingTree Loans:
Origination and sale of loans $ 89,701 30 % $ 68,739
Other 5,037 (31 )% 7,310
Total LendingTree Loans 94,738 25 % 76,049
Exchanges:
Match fees 32,307 (29 )% 45,687
Closed loan fees 18,180 (38 )% 29,092
Other 2,175 (1 )% 2,203
Inter-segment revenue 10,889 (31 )% 15,831
Total Exchanges 63,551 (32 )% 92,813
Real Estate 21,549 (24 )% 28,378
Inter-segment revenue (10,889 ) (35 )% (16,806 )
Total revenue $ 168,949 (6 )% $ 180,434
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LendingTree Loans revenue in 2009 increased $18.7 million, or 25%, from the same period in 2008. Revenue generated from the origination and sale of loans in the secondary market increased $21.0 million, or 30%, primarily due to a dramatically declining mortgage interest rate environment that began late in the fourth quarter of 2008, improvement in revenue per closed loan and higher loan closing rates. Offsetting this increase in revenue was a higher charge to the provision for previously sold loans, which is recorded as a reduction of revenue. The provision increased from $0.9 million in 2008 to $10.1 million in 2009, reflecting an increase in losses realized in the second and third quarters of 2009 that related primarily to loans sold in 2006 and 2007.
The dollar value of loans closed directly by LendingTree Loans is as follows:
Nine Months Ended
September 30,
2009 % Change 2008
(Dollars in millions)
Refinance mortgages $ 1,997 47 % $ 1,356
Purchase mortgages 236 (37 )% 374
Total $ 2,233 29 % $ 1,730
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LendingTree Loans originates mortgage loans on property located throughout the United States. Revenue from loans originated for property in California totaled approximately 12% and 4% of Tree.com's consolidated revenue for the nine months ended September 30, 2009 and 2008, respectively.
Revenue from the Exchanges declined $29.3 million, or 32%, due primarily to fewer loan requests from consumers, fewer matched requests with network lenders and fewer loans closed through network lenders. Matched requests in 2009 were down 27% from the same period in 2008 due to the five Federal Reserve interest rate cuts during the first quarter of 2008, which stimulated significant consumer demand on our network in the first quarter and the early part of the second quarter of 2008. Although mortgage rates remained at or near historical lows during most of 2009, the Exchanges experienced a decline in matched requests, reflecting both fewer qualified consumers in a tight credit market and lower network lender demand for consumer leads through the first six months of 2009. Management believes the lower demand for loan requests from network lenders during this time was primarily attributable to many lenders experiencing their own higher levels of organic lead volume through other channels during a low interest rate environment. This surge in organic volume likely caused production and warehouse capacity limitations for many of the lenders participating on the network. During the third quarter of 2009, network lender demand began to increase as the sudden rise in interest rates (50 to 60 basis points) in a brief span late in the second quarter and early in the third quarter caused many network lenders' organic consumer loan request volume to diminish. Additionally, as a result of fewer matched requests, closed loan units through the Exchange also declined resulting in 38% lower closed loan fees.
The dollar value of loans closed by Exchange network lenders is as follows:
Nine Months Ended
September 30,
2009 % Change 2008
(Dollars in millions)
Refinance mortgages $ 4,880 (12 )% $ 5,551
Purchase mortgages 1,756 (44 )% 3,145
Other 453 (72 )% 1,650
Total $ 7,089 (31 )% $ 10,346
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Real Estate revenue decreased $6.8 million, or 24%, principally due to a decrease in closings year-over-year due to the persistent negative real estate market conditions contributing to lower home sales prices and fewer real estate transactions overall. The dollar value of the Company's real estate closings decreased $528 million, or 36%, from $1.5 billion in 2008 to $944 million in 2009. However, Real Estate experienced positive growth in the number of agents working for our company-owned brokerage, which increased from 1,100 at the end of the third quarter 2008 to over 1,300 at the end of the third quarter 2009.
Cost of revenue
For the three months ended September 30, 2009 compared to the three months
ended September 30, 2008
Three Months Ended
September 30,
2009 % Change 2008
(Dollars in thousands)
LendingTree Loans $ 11,245 22 % $ 9,194
Exchanges 1,849 (36 )% 2,896
Real Estate 5,056 (15 )% 5,954
Unallocated-corporate 540 2 % 529
Cost of revenue $ 18,690 1 % $ 18,573
As a percentage of total revenue 37 % 37 %
Three Months
Ended
September 30,
As a Percentage of Segment Revenue 2009 2008
LendingTree Loans 47 % 46 %
Exchanges 8 % 11 %
Real Estate 63 % 61 %
Unallocated-corporate, as a percentage of total revenue 1 % 1 %
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Cost of revenue consists primarily of costs associated with loan originations, compensation and other employee-related costs (including stock-based compensation) related to customer call centers, real estate network support staff and loan officers, as well as credit scoring fees, consumer incentive costs, real estate agent commissions and website network hosting and server fees.
Cost of revenue overall in 2009 remained flat from 2008, however, there was some variation within the operating segments. The costs associated with loan originations in LendingTree Loans increased by $1.3 million, which corresponds to the increases in both revenue from the origination and sales of loans and the dollar value of loans closed directly by LendingTree Loans. In addition, commissions paid to real estate agents increased $0.6 million.
Offsetting these increases in cost of revenue were decreases of $0.7 million in compensation and other employee-related costs and $1.5 million in consumer incentive rebates related to decreased closings at the Exchanges and in Real Estate. The decrease in compensation and other employee-related costs reflects the net of reduced personnel costs associated with Tree.com's customer call center, settlement services operation and portions of its loan processing department, offset by an increase in commissions paid to loan officers at LendingTree Loans due to higher loan originations.
For the nine months ended September 30, 2009 compared to the nine months
ended September 30, 2008
Nine Months Ended
September 30,
2009 % Change 2008
(Dollars in thousands)
LendingTree Loans $ 37,104 14 % $ 32,407
Exchanges 5,760 (42 )% 9,864
Real Estate 13,712 (18 )% 16,731
Unallocated-corporate 1,627 - % 1,633
Cost of revenue $ 58,203 (4 )% $ 60,635
As a percentage of total revenue 34 % 34 %
Nine Months
Ended
September 30,
As a Percentage of Segment Revenue 2009 2008
LendingTree Loans 39 % 43 %
Exchanges 9 % 11 %
Real Estate 64 % 59 %
Unallocated-corporate, as a percentage of total revenue 1 % 1 %
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Cost of revenue in 2009 decreased $2.4 million from 2008 primarily due to decreases of $3.3 million in compensation and other employee-related costs and $4.6 million in consumer incentive rebates related to decreased closings at the Exchanges and in Real Estate. The decrease in compensation and other employee-related costs reflects the net of reduced personnel costs associated with Tree.com's customer call center, settlement services operation and portions of its loan processing department, offset by an increase in commissions paid to loan officers at LendingTree Loans due to higher loan originations.
Offsetting these decreases in cost of revenue was an increase of $4.0 million in costs associated with loan originations in LendingTree Loans and a $1.0 million increase in commissions paid to real estate agents. The increase in loan origination costs corresponds to the increases in both revenue from the origination and sales of loans and the dollar value of loans closed directly by LendingTree Loans. The increase in commissions paid to real estate agents both in dollars and as a percentage of revenue is due to an increase in the number of closings from agent-generated leads compared to closings from company-generated leads. Commissions paid to agents for closings from self-generated leads are typically paid out at a higher percentage of revenue than closings from company-generated leads.
Selling and marketing expense
For the three months ended September 30, 2009 compared to the three months
ended September 30, 2008
Three Months Ended
September 30,
2009 % Change 2008
(Dollars in thousands)
LendingTree Loans $ 5,820 16 % $ 5,022
Exchanges 15,637 (26 )% 21,218
Real Estate 1,221 (32 )% 1,803
Elimination of inter-segment marketing (5,243 ) 10 % (4,761 )
Selling and marketing expense $ 17,435 (25 )% $ 23,282
As a percentage of total revenue 34 % 46 %
Three Months
Ended
September 30,
As a Percentage of Segment Revenue 2009 2008
LendingTree Loans 24 % 25 %
Exchanges 66 % 83 %
Real Estate 15 % 18 %
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Selling and marketing expense consists primarily of advertising and promotional expenditures, fees paid to lead sources and compensation and other employee-related costs (including stock-based compensation) for personnel engaged in the sales function. Advertising and promotional expenditures primarily include online marketing, as well as television, print and radio spending. Advertising production costs are expensed in the period the related ad is first run.
Advertising for the Exchanges is primarily the building and maintaining of the Company's core brands, using both online and offline spending, and generates leads not only for the Exchanges but for our other segments as well. Marketing expense for LendingTree Loans is primarily comprised of inter-segment purchases of leads from the Exchanges, leveraging the LendingTree and GetSmart brands. The remainder of the expense is comprised of lead purchases from third parties. Advertising for Real Estate primarily consists of lead generation through online spending, as well as lead purchases from the Exchanges.
Overall selling and marketing expense in 2009 decreased $5.8 million from 2008 primarily due to a decrease of $5.5 million in advertising and promotional expenditures. In 2009, Tree.com decreased its online marketing advertising by $2.8 million, from $13.3 million in 2008 to $10.5 million in 2009. Tree.com also decreased its broadcast advertising by $2.3 million, from $6.4 million in 2008 to $4.1 million in 2009.
The decline in selling and marketing expense for the Exchanges segment, both in dollars and as a percentage of revenue, is due to the Exchanges' ability to decrease advertising spend due to naturally higher consumer demand driven by the favorable mortgage rate trends and improvements in organic traffic.
Tree.com anticipates that it will continue to adjust selling and marketing expenditures generally in relation to revenue producing opportunities and that selling and marketing will continue to represent a high percentage of revenue as it continues to promote its brands both online and offline.
For the nine months ended September 30, 2009 compared to the nine months
ended September 30, 2008
Nine Months Ended
September 30,
2009 % Change 2008
(Dollars in thousands)
LendingTree Loans $ 12,032 (28 )% $ 16,661
Exchanges 40,079 (46 )% 73,981
Real Estate 3,919 (37 )% 6,217
Elimination of inter-segment marketing (10,881 ) (31 )% (15,831 )
Selling and marketing expense $ 45,149 (44 )% $ 81,028
As a percentage of total revenue 27 % 45 %
Nine Months
Ended
September 30,
As a Percentage of Segment Revenue 2009 2008
LendingTree Loans 13 % 22 %
Exchanges 63 % 80 %
Real Estate 18 % 22 %
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Overall selling and marketing expense in 2009 decreased $35.9 million from 2008 primarily due to a decrease of $34.9 million in advertising and promotional expenditures. In 2009, Tree.com decreased its online marketing advertising by $21.7 million, from $46.4 million in 2008 to $24.7 million in 2009. Tree.com also decreased its broadcast advertising by $10.1 million, from $22.5 million in 2008 to $12.4 million in 2009.
The decline in selling and marketing expense for the LendingTree Loans segment, both in dollars and as a percentage of revenue, is related to a decrease in the cost per lead acquired from the Exchanges and receiving "overflow" leads from a partner that received more leads than their capacity could handle. The Exchanges were able to decrease advertising spend due to naturally higher consumer demand driven by the favorable mortgage rate trends and improvements in organic traffic.
General and administrative expense
For the three months ended September 30, 2009 compared to the three months
ended September 30, 2008
Three Months Ended
September 30,
2009 % Change 2008
(Dollars in thousands)
LendingTree Loans $ 5,276 (16 )% $ 6,304
Exchanges 1,934 4 % 1,858
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